Five Rules for Turning Your Vacation into Tax-Deductible Business Travel

When you convert your vacation into a business trip, your transportation expenses suddenly become deductible.

And when you travel for business, you deduct the expenses. Think of the tax deduction as a travel discount. The size of the discount depends on your tax bracket. That could amount to 30, 40, 50, or even 60 percent savings.

What kind of travel are we talking about? Business travel can be about as luxurious as you can dream up! For example, all of the following can qualify as deductible business travel expenses:

• Airfare, including first-class tickets and even flying your plane
• The presidential suite in a luxury hotel
• Rental car expenses for a Rolls-Royce
• Boat tickets—and yes, this includes cruise travel

So whether you plan to stay in a luxury resort in the Caribbean or simply need to visit the in-laws two states over, you could save a boatload in taxes when you turn your vacation into a business trip and deduct most or all of the cost.

Types of Travel Expenses

When you travel for business, you can deduct two big types of expenses:

1. Transportation expenses. The cost of transportation in the 50 states and Washington, D.C., is an all-or-nothing expense. If you spend most of your trip days on business, you deduct 100 percent of your direct-route transportation expenses. If most of your days are personal, you get zero deductions.
2. Life expenses. During travel, you can deduct the cost of sustaining life, including lodging and meals. You can deduct these expenses on business days but not on personal days.

The Basic Rule on Business Travel

According to the tax code, you can deduct your travel expenses as long as your trip is an “ordinary and necessary” cost of doing business. 

The courts have interpreted this rule extremely broadly. For example, an “ordinary” expense does not have to be a common practice in the industry.⁴ “Necessary” does not refer to a business need but rather to something “appropriate and helpful.”

As a result of this broad interpretation, the tax code rule isn’t very helpful unless you know more. That’s okay. We know it’s hard for our friends in Congress to come up with simple, clear rules.

To get the real story for business purposes, you have to sift through case law and see what the courts say in particular cases—which we do for you, beginning with the next section.

The Real Test

When courts decide business purpose cases, they consider all the relevant “facts and circumstances,” which, for our purposes, means we have to compare and contrast each case to find the overarching, guiding principles we can use in practice.

We have summarized the case law into five rules that you can use to justify a business purpose for your trip:

1. Profit motive. You must have a reason for the trip to help your business make money. You don’t have to show an immediate profit, but you must expect the trip to create profit for you at some point in the future. Write this reason down in your records.
2. Stay overnight. Remember the overnight rule. You get deductions only for business trips you stay overnight away from your tax home.
3. Apply the “for only” test. When you plan your trip, ask yourself: Would a rational businessperson travel for only the business reason—or is the personal element so important that it destroys the business purpose?
4. Primary purpose test. To travel in the United States, you must pass the primary purpose test. The easy way to do this is to make the most of your travel days business days. For tips on identifying business and personal days.
5. Maintain good records. This may be the most important step for your business travel deductions. As we explain below, you must keep the right records.

The Cases

Since courts decide cases based on specific facts, it’s helpful to hear the details of some actual cases.

The next few sections summarize some relevant cases, starting with the winners and then showing you some losing arguments that cost business owners their deductions.

Board Meetings in Resort Locations

Charles Hinton III was the sole owner of United Title Company, a C corporation based in North Carolina. Hinton sponsored an out-of-state board meeting each year, the first year in New Orleans, the next year in Las Vegas, and then in Puerto Rico.

Hinton invited

• the 11 to 14 corporate board members, and
• select North Carolina real estate attorneys, developers, agents, bankers, lenders, and their spouses or friends (the “business guests”).

During the trips, the corporation conducted the annual board meeting. Then, the corporate employees met with their business guests to discuss underwriting policy and other business topics.

Court ruling. All travel expenses were deductible (except for those for non-business spouses and friends). The corporation needed to hold the meetings in interesting locations to ensure their business guests would attend. The corporate employees benefited through the business discussions and by strengthening their relationships with other businesspeople in their field.

Trips to Expand Business

Raymond Jackson won travel deductions for trips he took outside his normal sales territory to pursue new client accounts. The trips allowed him to expand his business by finding new clients.

Note that if you are creating a new business that does not yet exist, you have to treat these expenses as start-up expenses, subject to special tax treatment.

Justifying Travel with a Convention or Seminar

Conventions are a great reason to travel since they often take place in areas that double as nice vacation spots. Here are a few points to remember about conventions:

• Travel expenses to conventions inside the North American area are deductible if the convention advances the interests of your business.
• Conventions outside the North American area must relate directly to the conduct of your business, and it must be reasonable for the event to occur in the chosen location.
• If the convention provides videotaped lectures, you can deduct travel expenses only if you cannot view the lectures from any other location. In other words, if you could have viewed the streamed lecture from home, you get no travel deductions.
• You cannot deduct the expenses when the seminar relates to one of your investment activities, not your trade or business.

Examples of Losing Arguments

You need to do better than the people on this next list.

These taxpayers lost their travel deductions because they could not prove a strong business reason for their trip.

Case #1 Description

George Buchanan, a custom plywood manufacturer, invited customers on a four-day trip to the Super Bowl in New Orleans. The accommodations included a hotel in the French Quarter and a Mississippi River cruise. The court decided that the central focus of the trip was entertainment, and the scattered business discussions were only incidental.

Reason for Losing

It does not pass the “for only” test. The trip does not make sense without the personal elements. Further, the Tax Cuts and Jobs Act has eliminated deductions for this type of entertainment.

Case #2 Description

Robert Blackshear, a minister, escorted a tour group to Europe but could not demonstrate a profit motive for the trip.

Reason for Losing

There is no profit motive.

Case #3 Description

Francis Manning lost deductions for five separate trips because he did not have adequate records proving the business nature of the trips.

Reason for Losing

He kept bad records.

Bad Records Will Sink You

Tax law requires you to keep records of the following elements as proof of your business travel:

• The amount of each separate expenditure for traveling away from home.
• Please provide the date of departure and return for each trip and the number of days during the trip spent on business.
• The name of the city or town you visited.
• The business reason for the travel or the nature of the benefit you expected to gain from the travel.

Conclusion

Navigating the nuances of tax deductions for business travel can significantly impact your financial strategy, turning necessary trips into a savvy fiscal maneuver. By understanding the IRS’s criteria for a deductible business expense and implementing rigorous record-keeping practices, you can optimize your travel expenditures for maximum tax benefit. Whether it’s a high-stakes board meeting in a luxurious locale or a convention that blends business with pleasure, the key lies in substantiating the business purpose and adhering to tax laws. Consider these principles, consult with a tax professional, and ensure that your travel plans are productive and tax-efficient.